Trump Economy Is Booming – but Tax Cuts Aren’t the Reason

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The U.S. economy is still expanding at a solid pace, with third-quarter GDP growth hitting 3.5 percent according to an initial estimate released by the Commerce Department Friday.

Growth has eased a bit compared to the previous quarter, which registered 4.2 percent, but economists say it is still well above the post-recession trend and strong enough to produce the best annual growth rate since before 2008. “Analysts had expected the economy to slow somewhat after a blockbuster second quarter,” The New York Times said, but “the economy remains on track to grow 3 percent or more this year, the first time it has achieved that pace since 2005.”

White House takes credit: Commerce Secretary Wilbur Ross attributed the strong growth to Trump administration policies. “Defying ‘conventional wisdom’ once again, 3.5 percent growth is the latest sign that the Trump economy continues to surge,” Ross said. “The President’s actions from deregulation to tax reform have supercharged the American economy, driving it to new heights.”

But the picture is more complicated: Experts said the solid topline number obscures some potentially troubling data within the report. Consumer spending was a key factor, rising 4 percent in the quarter, but a big drop in exports and “a steep slowdown in business spending raised concerns about whether the strength in the expansion is sustainable,” Bloomberg News said. Ian Shepherdson, chief economist at Pantheon Macroeconomics, summed it up this way: “In one line: Strong GDP growth hides soft capex and massive trade deterioration.”

Where is the tax cut investment bump? Consumer spending probably got a boost from the individual tax cuts, but business investment – the most important factor associated with the Republican tax plan and the one that was supposed to drive a big increase in capital investment and, eventually, wages – is showing no signs of a boom. “The third-quarter rate of business investment was the weakest since the fourth quarter of 2016,” The Wall Street Journal said. Non-residential fixed investment grew at just a 0.8 percent, and the Economic Policy Institute said that such investment is growing more slowly in the first three quarters of 2018 than it did in the same period in 2017 – before the tax cuts went into effect.

One factor stands out: Government spending is playing a major role in the current economic expansion. Earlier this week, The Wall Street Journal wrote, “A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half,” with the sharp uptick in outlays associated with the budget deal earlier this year accounting for nearly half of the economic growth during that time. Friday’s GDP report provides more support for this thesis, with government spending rising more than 3 percent in the quarter. “For now, government largess is helping to lift the economy,” the Times said. Financier and former Obama administration official Steven Rattner highlighted the government spending factor in a tweet: “Note the resurgent contribution to growth from government spending which added 0.6-ppnts over 3Q with both defense and non-defense on the rise. The budget deal passed earlier this year supports continued growth through FY19.”

Five Takes on the Economy

Some other comments from economic analysts on today’s GDP report:

Paul Ashworth, chief US economist at Capital Economics: “The current strength of the economy is largely due to the boost from the massive fiscal stimulus at the start of this year. But we always expected the impact on growth from the one-off step-up in household incomes and post-tax corporate profits to fade in 2019. At the same time, monetary policy is becoming a more significant headwind.”

Ben Casselman of the New York Times: “Companies are investing more in intellectual property. But other than that, business investment was anemic in Q3. Not much evidence of a big boost from the tax law.”

Joseph LaVorgna, chief economist for the Americas at Natixis: “Nonresidential fixed investment, which covers a panoply of firm-wide expenditures, increased less than 1 percent last quarter. This was its worst showing in nearly two-years despite tailwinds from the recently enacted corporate tax cut.”

Josh Bivens of the Economic Policy Institute: “Today’s report provides some clear evidence about why this pick-up has occurred: fiscal policy swung from steeply contractionary to expansionary. The contribution to growth made by federal spending in the so far in 2018 has been stronger than any other comparable period since 2010—when spending from the Recovery Act was still at its peak. Those looking for policy lessons from the economy’s growth pick-up in 2018 should focus here—expansionary fiscal policy, particularly spending, works to boost the economy.”